Crypto backed by crypto: Dai seeks to change 'stablecoin' game
December 9, 2019
Tech

Crypto backed by crypto: Dai seeks to change ‘stablecoin’ game

LONDON – Some are backed by dollars. Others by gold. But this “stablecoin” isn’t tied to any major asset – it’s backed by another cryptocurrency.

Stablecoins, such as Facebook’s Libra, are a new breed of cryptocurrencies that aim to escape the wild price swings that make bitcoin unworkable for commerce. They base their value on more stable underlying assets, typically traditional currencies or commodities.

But Dai, in a major divergence from others, uses a volatile digital currency – ethereum – to maintain a steady value.

This might appear to defy common sense, but its advocates say the way it works – with “smart contracts,” blockchain-based covenants with terms set in code – means Dai will always keep a stable value while offering transparency.

Stablecoins like Libra and Tether are in global regulators’ sights, partly because of concerns over how the companies behind them manage the reserves that back them.

Dai, launched in 2017, seeks to dodge such concerns by giving up control of the ethereum coins its value is tied to, locking them instead in the blockchain contracts run by algorithms. That, supporters say, offers the benefits of stablecoins – instant transactions and steady value – while avoiding governance risks.

It is gaining some traction: the Oxfam aid agency is testing it for distributing aid on a Pacific island, while some Argentinian savers desperate to avoid inflation are using it.

How regulators treat Dai could help shape how, and if, cryptocurrencies can evolve from speculative use to a de facto money of the internet. But their response is still unclear.

Reuters is tracking the emergence of contenders to bitcoin – the “altcoins” – as they attract increasing attention from investors, regulators, companies and individuals.

The fourth in the series looks at Dai.

HOW DOES IT WORK?

Like bitcoin, Dai hopes to power a digital economy where people can bypass banks and other financial firms to transact directly with one another. Its workings are complex.

Dai is effectively pegged to the dollar, and backed by ethereum cryptocurrency locked in publicly viewable contracts that are stored on the blockchain.

Many stablecoins are trusted because their value is underpinned by central bank currencies. Users trust Dai, on the other hand, as the ethereum that is locked in the contracts always exceeds the value of Dai in circulation.

When Dai’s value strays too far from the dollar, balancing mechanisms kick in to guide it back.

“With a decentralized stablecoin, you can see everything on the blockchain,” said Rune Christensen, founder of the protocol that Dai runs on, MakerDAO. “Anyone can go and do a real-time audit.”

(Content and Photos syndicated via Reuters)

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